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Hershey Up More Than 10% in 3 Months: More Room for Growth?

The Hershey Company 's HSY shares have rallied 10.5% in the past three months, outpacing the industry 's 9.2% growth. In fact, this Zacks Rank #3 (Hold) stock has gained 8.9% since its second-quarter 2018 earnings release. Though Hershey remains pressurized by cost hurdles, we expect its growth drivers to provide respite and fuel it further.

Focus on Buyouts - a Major Strength

Hershey is gaining from its buyout of Amplify Snack Brands, the maker of SkinnyPop and Tyrrell's potato chips, which was concluded in January 2018. Notably, the company's sales gained 5.9 points from this acquisition during the second quarter of 2018. This was in fact the major driver of Hershey's North American segment sales in the said period. Increased volumes and net price realization also benefited sales growth during the second quarter, wherein both top and bottom lines increased year over year and came ahead of the Zacks Consensus Estimate. Results gained from solid demand for the company's chocolate brands and Amplify's buyout.

With several plans rolled up its sleeve to further strengthen the Amplify brands, Hershey expects greater yields from this buyout in the forthcoming quarters. In prior developments, the acquisition of New York-based barkTHINS (April 2016) premium chocolate snacking brand has also been aiding the company's better-for-you snacks portfolio.

Efforts to Improve International Presence

Hershey is accelerating its business in key markets like China, India, Brazil and Mexico where consumer spending growth is positive. Hershey is slowly activating its five core brands in these markets. Constant currency net sales in Mexico, Brazil and India increased 15% and 12% in the second and first quarter of 2018, respectively. Among the emerging countries, the company's special focus is on China, which has one of the largest consumer base. The company plans to add additional manufacturing capacity and resources to boost growth in the region. To this end, it started the implementation of the Margin for Growth Program (discussed below) in the second quarter of 2017 to optimize the manufacturing operations to support the China business.

Productivity Improvements and Cost Savings

Hershey focuses on optimizing its portfolio in order to deliver increased profitability. In this respect, the company's SKU rationalizing efforts have been progressing well. In addition, the company remains on track with its Margin for Growth multi-year program. Per this multi-year initiative, Hershey will reduce its global workforce outside the United States by 15%. This is also intended to improve overall operating margin through supply-chain optimization, a streamlined operating model and reduced administrative expenses, with savings primarily being achieved in 2018 and 2019. These moves are anticipated to boost efficiency, leverage global shared services and common processes, and increase capacity utilization. Incidentally, the company expects savings from its ongoing Margin for Growth program in 2018 in the range of $80 million and $90 million. Additionally, the company has undertaken strategic pricing initiatives to improve mix. Such efforts are likely to aid the company boost savings that can, in turn, be invested in endeavors to drive growth.

Wil Cost Hurdles be Offset?

During the second quarter of 2018, adjusted gross margin shrunk 260 basis points (bps) due to escalated freight and logistics expenses, adverse mix, greater trade and packaging investments, and incremental plant expenses associated with new production lines. Prior to this, in the first quarter of 2018, adjusted gross margin declined 260 bps. This apart, higher costs have been a drag on the company's operating margins as well. Adjusted operating margin contracted 140 bps and 150 bps during the second and first quarters of 2018.

Such cost-related pressures are likely to continue in 2018, and thereby remain a threat to profitability. Nonetheless, the aforementioned strategic endeavors along with Hershey's robust brand portfolio and focus on innovation are likely to help offset these headwinds.

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

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